Court of Appeal Clarifies the Duty to Defend and Ability to Control Litigation Where Overlapping Coverage Exists: Markham v AIG
Apr 06, 2020
In Markham (City) v AIG Insurance Company of Canada, 2020 ONCA 239, the Court of Appeal deals with coverage issues that arise from third-party liability insurance and conflicts of interest.
A boy was injured during a hockey game and brought a claim against the City of Markham (which owned the rink where the game took place), the “Waxers” (the local hockey club that had rented the rink), and Hockey Canada. The Waxers and Hockey Canada were both insured by AIG Insurance Company of Canada under a commercial general liability policy. The City was insured by Lloyd’s Underwriters under a commercial general liability policy. The Lloyd’s policy contained a clause stipulating that it would serve as excess insurance in instances where another existing policy covered the claim.
According to the rental agreement between the City and Waxers, the City was to be included under the AIG policy as an additional insured but only against claims relating to the operations of Waxers and Hockey Canada. Subsequent to the original claim, the City and Hockey Canada crossclaimed against each other and the City commenced a third-party claim against Waxers.
Regarding coverage, Lloyd’s and the City asserted that AIG was the primary insurer and that Lloyd’s had no duty to defend the claims. The Application Judge, Justice Annette Casullo, agreed with this argument, pointing to Carneiro v Durham (Regional Municipality),  O.J. No. 6812 as support. According to Carneiro, if an insurer fails to specify in its policy that its duty to defend is strictly limited to covered claims, it will have a duty to defend all claims, including those that are not covered under the policy. Since the present action involved “mixed claims”, meaning a mix of covered and not covered claims, and AIG had not specified in its policy that it would only defend covered claims, Justice Casullo suggested that AIG was the only insurer with a duty to defend.
Writing for Justices David Brown and David Doherty, Justice Julie Thorburn found on behalf of the Court of Appeal panel that this was too broad of an interpretation of the Carneiro decision. Despite there being some overlap in what the two policies covered, certain claims were only insured under the Lloyd’s policy. As a result, Lloyd’s was found to have a duty to defend the claims that fell outside of the scope of the AIG policy. The fact that the claim was mixed and that the additional insurer had a duty to defend did not absolve the primary insurer from its duty to defend. In her analysis of Carneiro, Justice Thorburn pointedly emphasized that there can still be a division of claims between insurers (and thus a division of duties) even in so-called “mixed claims”.
Since both insurers had a duty to defend, both were obligated to contribute to the City’s defense costs. Justice Thorburn found it just to have the two insurers split the costs equally pending the conclusion of the action.
The final issue that Justice Thorburn dealt with involved whether AIG had a right to participate in the defense, including the right to retain and instruct counsel. Both insurers’ policies granted them the respective right to defend the action. The insured elected to have AIG defend the action. It was argued by Lloyd’s and the City that AIG should not have a right to participate due to conflicting interests.
In dealing with this issue, the Court cited its own decision from Brockton (Municipality) v Frank Cowan Co. (2002), 57 O.R. (3d) 447 (C.A.). In Brockton, it was noted that there had to be “a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer’s expense”. Counsel’s mandate towards the insurer had to conflict with its mandate towards the insured.
Justice Thorburn determined that there may be a reasonable apprehension of conflict of interest on the part of counsel appointed by AIG. It was in AIG’s interest to have liability found on the City’s actions alone (i.e. actions that the AIG policy did not cover) because AIG would not be responsible for paying for those damages.
Justice Thorburn also cited Hoang v Vincentini, 2015 ONCA 780, 57 C.C.L.I. (5th) 119, noting that counsel must meet their ethical and legal obligations to represent the interests of the insured. The Hoang decision was notable in that it emphasized the importance of this principle to the detriment of the rights of the insurer to control the litigation.
Despite all of this, AIG was allowed to participate in the defense as long as the proper screening methods were put in place. Such methods are ones that “minimize the risk of harm by creating a system to protect confidential information and separate files, enable all three parties to participate in retaining, instructing and receiving instructions from counsel and provide recourse against those who do not adhere to the system.” This system must likewise keep all parties informed as to the proceedings.
In approving this screening mechanism, Justice Thorburn creates a more balanced approach to who gets to control the litigation by giving some power back to the insurer. Whereas Brockton and Hoang granted greater control over the litigation to the insured, the screening system used to mitigate the reasonable apprehension of conflict gives some of that control back to the insurer. Further, by giving this power over the litigation to the additional insurer, Justice Thorburn grants it similar rights to that of the primary insurer, there again creating a balance of power.